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    Departures from GAAP for Graham Company: audit opinions

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    On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the Highway Department announced a new feeder roadway route that would run alongside the site. The effect was a dramatic increase in local property values. Nearby comparable land sold for $700,000 in December of the current year. Graham shows the land at $700,000 in its accounts, and, after reduction for implicit taxes at 33 percent, the fixed asset total is $400,000 larger, with the same amount shown separately in a stockholders' equity account titled "Current value increment." The valuation is fully disclosed in a footnote to the financial statements, along with a letter from a certified property appraiser attesting to the $700,000 value.

    a. Write the appropriate audit report, assuming you believe the departure from GAAP is material but not enough to cause you to give an adverse opinion.

    b. Write the appropriate report, assuming you believe an adverse opinion is necessary.

    c. For discussion: Should you (could you) issue a report conforming to Rule 203 of the AICPA Code of Professional Conduct?

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    Solution Preview

    a. The Board of Directors and Stockholders
    Graham Company

    We have audited the accompanying balance sheet of Graham Company as of December 31, 2006, and the related statement of income and stockholders' equity, and cash flows for the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    As described in Note x, the company has valued land at appraised fair market value which exceeds the cost basis by $400,000 after ...

    Solution Summary

    The 770 word solution presents audit opinions in good form for a qualified opinion and an adverse opinion based on the facts and circumstances in the problem. Rule 203 is discussed including the application to Graham Company.